HSBC: Super-Long JGBs Back In Favour

Friday saw HSBC note that they “see value in the super-long segment of the JGBs curve and believe that the recent trend of steepening in the super-long segment will be contained by the demand from the BoJ and the domestic life insurance sector. The steepening of the super-long segment of the JGB curve has partly been a function of market positioning for various scenarios of a potential BoJ policy exit. Moreover, the BoJ’s leadership transition next year (Kuroda’s term ends in April 2023) and domestic inflation have further added to steepening pressure.”

• “From a non-resident’s perspective, the super-long segment also appears attractive. Dollar based investors can take advantage of the current wide cross-currency basis for meaningful yield pick-up. For example, buying 30-Year JGBs on a x-ccy basis provides pick-up of 87bp over 30-Year U.S. Treasuries.”
• “Looking at past supplementary budgets and methods of funding, the bulk of the extra funds required tend to be raised through issuance in the treasury bills market, which should limit distortions on super-long yields from the bond supply channel.”